Nov. 19 (Bloomberg) -- JPMorgan Chase & Co. has resolved
the last obstacles to a record $13 billion settlement of civil
state and U.S. probes over the sale of mortgage bonds, clearing
the way for a deal today after months of negotiations, two
people briefed on the matter said.

The accord includes a previously disclosed $4 billion
settlement to end a 2011 Federal Housing Finance Agency lawsuit,
said one of the people, who asked not to be identified because
the discussions are private.

While the deal would mark the largest amount paid by a
financial firm in a settlement with the U.S., the Justice
Department is still probing JPMorgan’s recruiting practices in
Asia, energy trading and its relationship with Ponzi scheme
operator Bernard Madoff. The New York-based bank has tapped $8
billion of $28 billion in reserves set aside since 2010 to cover
legal costs.

“It’s good they’re getting this done, but it’s a fairly
narrow band of cases they are settling,” said Jacob Frenkel, a
former Securities and Exchange Commission lawyer who’s now a
partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac,
Maryland. “There are still other open investigations that this
doesn’t address, and those will run their course.”

JPMorgan agreed to drop litigation against the Federal
Deposit Insurance Corp. related to some bonds sold by Washington
Mutual Inc., the people said. The bank battled with the FDIC
over who should pay some liabilities from the failed Seattle
thrift that the agency placed into receivership in 2008 while
selling assets to JPMorgan. The deal doesn’t resolve a criminal
probe led by the U.S. Attorney’s office in Sacramento,
California, into the company’s mortgage-bond sales.

Seeking Reimbursement

JPMorgan, led by Chief Executive Officer Jamie Dimon,
announced a tentative $4.5 billion deal last week with 21
institutional investors, including Pacific Investment Management
Co., to settle separate claims that the lender and its
subsidiaries sold faulty mortgage bonds. The bank may seek
reimbursement from the FDIC for claims against WaMu from those
investors, two people familiar with the matter said.

In addition to the U.S. probes, the $13 billion accord will
resolve cases with five states, including New York, California
and Illinois, one person said, without identifying the other
two.

The amount, which increased from an $11 billion proposal in
September, represents more than half of JPMorgan’s net income
last year. Only seven companies in the Dow Jones Industrial
Average earned more than $13 billion in 2012, data compiled by
Bloomberg show.

‘Huge Settlement’

“This would be a huge settlement and there are more to
come,” said Michael Bresnick, who was executive director of
President Barack Obama’s Financial Fraud Enforcement Task Force
until August and is now a partner at Stein Mitchell Muse &
Cipollone LLP in Washington. “These cases take time, and you’ve
got to put in the time, the energy and the resources and put the
work in, and we’re starting to see those results now.”

Obama ordered the creation of the task force last year to
coordinate a crackdown on deceptive underwriting practices that
contributed to the financial crisis.

The settlement, which includes a $2 billion fine, will end
civil investigations by the Justice Department as well as
lawsuits by the FDIC and National Credit Union Administration,
people briefed on the talks said.

Andrew Gray, a spokesman for the FDIC, JPMorgan’s Brian
Marchiony and Brian Fallon at the Justice Department said they
couldn’t comment because the negotiations are confidential.

Struggling Homeowners

The consumer-relief portion of the accord, negotiated over
the weekend by Associate Attorney General Tony West and U.S.
Housing and Urban Development Secretary Shaun Donovan, requires
JPMorgan to hire an independent monitor and provide the entire
$4 billion by the end of 2016, one of the people said.

JPMorgan’s costs include at least $1.5 billion in principal
writedowns for struggling homeowners with federally backed
loans, the person said. Of that, $1.2 billion would be for first
lien principal writedowns. At least $300 million must go toward
forbearance, in which banks shift loan terms to account for a
change in a debtor’s income, the person said.

An additional $2 billion would fund interest-rate
reductions of existing loans, new loans or loan originations
that JPMorgan would be required to keep in its portfolio, the
person said. The bank also would receive credit for anti-blight
efforts, such as the costs of demolishing vacant homes and
absorbing the mortgages of such properties the bank has yet to
foreclose on, the person said.

If JPMorgan doesn’t provide the entire $4 billion by the
end of 2016 then the bank would be required to pay any leftover
portion to the government or a nonprofit, the person said.

Lawsuit Threat

U.S. prosecutors in California overseeing parallel civil
and criminal investigations prepared to file a case against
JPMorgan in late September, a person familiar with the matter
said. The threat of that suit helped restart negotiations
between the bank and senior Justice Department officials over a
broader pact that would incorporate several state and federal
probes, the person said.

Proposed settlement amounts swung by billions of dollars
during the negotiations, people with knowledge of the talks
said. At one point, federal officials rejected the bank’s offer
to pay $3 billion to $4 billion, one person said at the time.
The talks spanned a government shutdown in October.

Holder Meeting

Dimon, 57, negotiated outlines of the deal in a call with
Attorney General Eric Holder on Oct. 18 following a face-to-face
meeting in Washington Sept. 26, people familiar with the matter
said at the time. The bank is trying to bundle costs for as many
legal cases as possible into the second half of this year, one
of the people said.

The $13 billion agreement adds to $1.8 billion in fines and
other payments JPMorgan has agreed to since July to end
investigations unrelated to mortgages. That includes more than
$1 billion for probes of a record trading loss last year, $410
million to settle accusations it manipulated energy markets and
$389 million to resolve claims it unfairly charged customers for
credit-monitoring products.

Two former employees in London were indicted Sept. 16 in
the U.S. on charges including securities fraud and conspiracy in
connection with the more than $6.2 billion trading loss on
derivatives last year. The SEC’s investigation of individuals
remains open, as does the Federal Bureau of Investigation’s
criminal probe of the loss. The FBI also is examining the bank’s
energy-trading operations and hiring practices in Asia.

Share Repurchases

In anticipation of today’s deal, JPMorgan took a $7.2
billion charge for expenses tied to regulatory matters and
litigation in the third quarter, leading the bank to announce a
$380 million loss on Oct. 11. Days after the surprise loss was
announced, Laban P. Jackson, a JPMorgan board member, voiced
support for Dimon, calling him “the best manager I’ve ever
seen.”

The mounting fines and other sanctions are eroding
JPMorgan’s profit for the year and placing the firm’s $6 billion
share-repurchase program at risk, Charles Peabody, an analyst at
Portales Partners LLC, wrote in a Sept. 25 note to investors.
Analysts’ average estimate for JPMorgan’s full-year profit
dropped 18 percent in the month through Oct. 21 as talks on the
mortgage-bond settlement progressed, according to data compiled
by Bloomberg.

The six biggest U.S. banks, led by JPMorgan and Charlotte,
North Carolina-based Bank of America Corp., have piled up more
than $100 billion in legal costs since the financial crisis, a
figure that exceeds all of the dividends paid to shareholders in
the past five years, according to data compiled by Bloomberg.